Is your home a better investment than the stock market?

I'll admit it: There are times that I think everything that needs to be said about personal finance has been said already, that all of the information is out there just waiting for people to find it. The problem is solved.

Perhaps this is technically true, but now and then — as this morning — I'm reminded that teaching people about money is a never-ending process. There aren't a lot of new topics to write about, that's true (this is something that even famous professional financial journalists grouse about in private), but there are tons of new people to reach, people who have never been exposed to these ideas. And, more importantly, there's a constant stream of new misinformation polluting the pool of smart advice. (Sometimes this misinformation is well-meaning; sometimes it's not.)

Here's an example. This morning, I read a piece at Slate by Felix Salmon called “The Millionaire's Mortgage”. Salmon's argument is simple: “Paying off your house is saving for retirement.”

Now, I don't necessarily disagree with this basic premise. I too believe that money you pay toward your mortgage principle is, in effect, money you've saved, just as if you'd put it in the bank or invested in a mutual fund. Many financial advisers say the same thing: Money you put toward debt reduction is the same as money you've invested. (Obviously, they're not exactly the same but they're close enough.)

So, yes, paying off your home is saving for retirement. Or, more precisely, it's building your net worth.

But aside from a sound basic premise, the rest of Salmon's article boils down to bullshit.

Salmon is extrapolating -- and worse

Lying with Statistics

Looking past the “paying off your house is saving for retirement” subtitle on his piece (a subtitle that was likely added by an editor, not by Salmon), we get to his actual thesis: “Making mortgage payments can, in theory, be a way to accumulate wealth almost as effectively as contributing to a retirement fund.”

I'm glad Salmon qualified this statement with “in theory” and “almost” because this is pure unadulterated bullshit. And it's dangerous bullshit. Here's how this “logic” works:

If you buy an urban house today for $315,000 (the average price) and it appreciates at 8 percent a year for the next 15 years, you will be living in a $1 million house by the time you pay off your 15-year mortgage, and you will own it free and clear. Which is to say: You’ll be a millionaire.

For this to be true, here's what has to happen.:

  • Home prices in your area have to appreciate at an average of eight percent not just this year and next year, but for fifteen years.
  • You have to take out a 15-year mortgage instead of a 30-year mortgage.
  • You need to stay in that house (or continue to own it) for that entire fifteen years.
  • Once you've become a millionaire homeowner, you now have to tap that equity for it to be of use. To do that, you have to sell your home, acquire a reverse mortgage, or otherwise creatively access the value locked in your home.

The real problem here, of course, are the assumptions about real estate returns. Salmon spouts huckster-level nonsense:

The 8 percent appreciation rate is aggressive, but not entirely unrealistic: It’s lower than the 8.3 percent appreciation rate from 2011 through 2017, and also lower than the 9 percent appreciation rate from 1996 to 2007.

That's right. Salmon cites stats from 1996 to 2007, then 2011 to 2017 — and completely leaves out 2008 to 2010. WTF?

This as if I ran a marathon and told you that I averaged four minutes per mile…but I was only counting the miles during which I was running downhill! Or I told you that Get Rich Slowly earned $5000 per month…but I was only giving you the numbers from April. Or I logged my alcohol consumption for thirty days and told you I averaged three drinks per week…but left out how much I drank on weekends.

This isn't how statistics work! You don't get to cherry pick the data. You can't just say, “Homes in some markets appreciated 9% annually from 1996 to 2007, then 8.3% annually from 2011 to 2017. Therefor, your home should increase in value an average of eight percent per year.” What about the gap years? What about the period before the (very short) 22 years you're citing? What makes you think that the boom times for housing are going to continue?

Long-Term Home Price Appreciation

In May, I shared a brief history of U.S. homeownership. To write that article, I spent hours reading research papers and sorting through data. One key piece of that post was the info on U.S. housing prices.

Let me share that info again.

For 25 years, Yale economics professor Robert Shiller has tracked U.S. home prices. He monitors current prices, yes, but he's also researched historical prices. He's gathered all of this info into a spreadsheet, which he updates regularly and makes freely available on his website.

This graph of Shiller's data (through January 2016) shows how housing prices have changed over time:

The Shiller Index of Home Prices

Shiller's index is inflation-adjusted and based on sale prices of existing homes (not new construction). It uses 1890 as an arbitrary benchmark, which is assigned a value of 100. (To me, 110 looks like baseline normal. Maybe 1890 was a down year?)

As you can see, home prices bounced around until the mid 1910s, at which point they dropped sharply. This decline was due largely to new mass-production techniques, which lowered the cost of building a home. (For thirty years, you could order your home from Sears!) Prices didn't recover until the conclusion of World War II and the coming of the G.I. Bill. From the 1950s until the mid-1990s, home prices hovered around 110 on the Shiller scale.

For the past twenty years, the U.S. housing market has been a wild ride. We experienced an enormous bubble (and its aftermath) during the late 2000s. It looks very much like we're at the front end of another bubble today. As of December 2017, home prices were at about 170 on the Shiller scale. (Personally, I believe that once interest rates begin to rise again, home prices will decline.)

Here's the reality of residential real estate: Generally speaking, home values increase at roughly the same (or slightly more) than inflation. I've noted in the past that gold provides a long-term real return of roughly 1%, meaning that it outpaces inflation by 1% over periods measured in decades. For myself, that's the figure I use for home values too.

Crunching the Numbers

Because I'm a dedicated blogger (or dumb), I spent an hour building this chart for you folks. I took the afore-mentioned housing data from Robert Shiller's spreadsheet and combined it with the inflation-adjusted closing value of the Dow Jones Industrial Average for each year since 1921. (I got the stock-market data here.) If you'd like, you can click the graph to see a larger version.

Home Prices vs Stock Market Returns

Let me explain what you're seeing.

  • First, I normalized everything to 1921. That means I set home values in 1921 to 100 and I set the closing Dow Jones Industrial Average to 100. From there, everything moves as normal relative to those values.
  • Second, I'm not sure why but Excel stacked the graphs. (I'm not spreadsheet savvy enough to fix this.) They should both start at 100 in 1921, but instead the stock market graph starts at 200. This doesn't really make much of a difference to my point, but it bugs me. There are a few places — 1932, 1947 — where the line for home values should actually overtake the line for the stock market, but you can't tell that with the stacked graph.

As the chart shows, the stock market has vastly outperformed the housing market over the long term. There's no contest. The blue housing portion of my chart is equivalent to the line in Shiller's chart (from 1921 on, obviously).

Now, having said that, there are some things that I can see in my spreadsheet numbers that don't show up in this graph.

Because Felix Salmon at Slate is using a 15-year window for his argument, I calculated 15-year changes for both home prices and stock prices. I'll admit that the results surprised me. Generally speaking, the stock market does provide better returns than homeownership. However, in 30 of the 82 fifteen-year periods since 1921, housing provided better returns. (And in 14 of 67 thirty-year periods, housing was the winner.) I didn't expect that.

In each of these cases, housing outperformed stocks after a market crash. During any 15-year period starting in 1926 and ending in 1939 (except 1932), for instance, housing was the better bet. Same with 1958 to 1973. In other words, if you were to buy only when the market is declining, housing is probably the best bet — if you're making a lump-sum investment and not contributing right along.

Another thing the numbers show is that you're much less likely to suffer long-term declines with housing than with the stock market. Sure, there are occasional periods where home prices will drop over fifteen or thirty years, but generally homes gradually grow in value over time.

The bottom line? I think it's perfectly fair to call your home an investment, but it's more like a store of value than a way to grow your wealth. And it's nothing like investing in the U.S. stock market.

For more on this subject, see Michael Bluejay's excellent articles: Long-term real estate appreciation in the U.S. and Buying a home is an investment.

Final Thoughts

Honestly, I probably would have ignored Salmon's article if it weren't for the attacks he makes on saving for retirement. Take a look at this:

If you’re the kind of person who can max out your 401(k) every year for 30 or 40 years straight — disciplined, frugal, and apparently immune to misfortune — then, well, congratulations on your great good luck, and I hope you’re at least a little bit embarrassed at how much of a tax break you’re getting compared to people who need government support much more than you do.

Holy cats! Salmon has just equated the discipline and frugality that readers like you exhibit with “good luck”, and simultaneously argued that you should be embarrassed for preparing for your future. He wants you to feel guilty because you're being proactive to prepare for retirement. Instead of doing that, he wants you to buy into his bullshit “millionaire's mortgage” plan.

This crosses the line from marginal advice to outright stupidity.

There's an ongoing discussion in the Early Retirement community about whether or not you should include home equity when calculating how much you've saved for retirement. There are those who argue “absolutely not”, you should never consider home equity. (A few of these folks don't even include home equity when computing their net worth, but that fundamentally misses the point of what net worth is.)

I come down on the other side. I think it's fine — good, even — to include home equity when making retirement calculations. But when you do, you need to be aware that the money you have in your home is only accessible if you sell or use the home as collateral on a loan.

Regardless, I've never heard anyone in the community argue that you ought to use your home as your primary source of retirement saving instead of investing in mutual funds and/or rental rental properties. You know why? Because it's a bad idea!

More about...Home & Garden, Investing, Retirement

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Liz
Liz
1 year ago

The author of this article says if you max out your 401K you are getting an undeserved tax break, but yet he advocates paying mortgage payments that also get you some decent tax breaks! ???

Ross Williams
Ross Williams
1 year ago
Reply to  Liz

1) Very few people get a tax break on their mortgage. And the tax break they get is only on the interest they pay. 2) If you are going to talk about return on investment on a home you can’t look only at appreciation any more than you can ignore dividends on stock or interest paid on bonds. The main return on a home investment is the cost of rent. 3) Homes are the primary source of net worth for good reason. It is really the only investment people can leverage. So if you put $100,000 down on a $500,000… Read more »

Liz
Liz
1 year ago

And it does not take good luck to save a little bit of each paycheck even through hard times . . . The author of this article is probably an idiot.

Ross Williams
Ross Williams
1 year ago
Reply to  Liz

Here is what he said: “If you’re the kind of person who can max out your 401(k) every year for 30 or 40 years straight — disciplined, frugal, and apparently immune to misfortune — then, well, congratulations on your great good luck,” The maximum contribution to a 401(K) is $18,000 is over half the median wage in the United States and more than someone making minimum wage makes in a year. Being able to contribute that amount for 30-40 straight years requires more than being disciplined and frugal, it requires that you have an upper middle class income for most… Read more »

Donna Freedman
Donna Freedman
1 year ago
Reply to  Ross Williams

I agree. “Luck” also has a lot to do with whether or not you develop a chronic illness or some non-cancer ailment that can wipe you out both physically and fiscally. Multiple sclerosis and severe rheumatoid arthritis are two example that immediate pops into my head. Luck might also affect whether you give birth to a child with a severe ailment. Whether the illness is yours or a kid’s, you’re likely to spend a lot more time at the doctor’s office and/or hospital, and pay a lot of non-covered expenses, and not be able to work as much. One result… Read more »

Justin
Justin
1 year ago
Reply to  Donna Freedman

However, people making minimum wage can’t afford homes so they don’t play into this argument anyway.

ScoreShuttle
ScoreShuttle
1 year ago

It may be true that most topics about finance have been said already – but there are always new people that want to get involved. Therefore, there is no such thing as “old” information.
Great read!

S.G.
S.G.
1 year ago

Thank you JD for reading the stupidity so the rest of us don’t have to. I feel dumber just having read the excerpts and I now want to sit in a corner and rock myself until the bad man goes away.

I wonder if you could reach out to this guy, writer to writer, and maybe interview him and see if you can fix some of the stupid. If you can get through to him you might have some really good material for your “back to basics” posts.

dividendgeek
dividendgeek
1 year ago

I would definitely have to say stock market. But, it helps to diversify and home provides a nice diversification.

Farbs
Farbs
1 year ago

I think this is a different point than the linked article was making, but I do think the analysis is a little more complicated than simply comparing changes in asset values (DJIA versus housing) over a long period of time. Leverage is legally permitted to a far greater extent in housing and other real-estate investments than in stock investing, and investors aren’t subject to margin calls on real estate investments like they are in stock investments, so leverage in the real estate market isn’t quite as risky as leverage in the stock market. An interesting comparison (which I don’t think… Read more »

WantNotToWantNot
WantNotToWantNot
1 year ago

Wow, Salmon is making some truly ignorant statements! Especially his attack on folks who have the discipline to save! Could there be a little bit of envy going on there? Maybe Salmon’s got most of his net worth tied up in his house? Just sayin’! Diversify, diversify, diversity. Ideally, you should hold mostly stock index funds that appreciate more quickly, but also some bonds, CDs, Treasuries, and a paid-off house so that in good times you can float steadily upward, and during downturns (or job layoff) you’re in a low-cost housing situation with some stable stuff to draw from. That’s… Read more »

KDT
KDT
1 year ago

My net worth isn’t really that important to me during my income earning years. Where it becomes important is during retirement when my assets have to be able to support me.

If you consider a rate of return of 4% for your liquid assets, a paid off house is worth the amount of money you don’t have to have in liquid assets to pay rent every month.

If rent would be $20,000 a year, the value of my paid off house is $20,000/.04 or $500,000 assuming I don’t plan on moving. Of course this ignore maintenance.

Elle
Elle
1 year ago

I concur he is nuts. We need to live somewhere when we stop paid employment. Why not stay in this 1991 purchased home long ago paid off? And it’s only worth 3X what we paid….nowhere near a million. We could sell it and have to pay much more to replace it in the part of town we want to reside in for our later years.

So kind of you to save us the time of reading his detritis.

Debbie
Debbie
1 year ago

Wow, so my being disciplined, responsibly planning for my future and lifelong saving is “good luck”. Then he has the nerve to shame me for that. If my house was my retirement vehicle then I would have that pesky issue of having to sell it to access my retirement funds. Bad plan in general.

Thanks but no thanks. I’ll keep hanging out with the responsible people as we plan for our futures and enjoy living in our present day life without the latest expensive toy.

Michael Clark
Michael Clark
1 year ago

Once the house is paid off, is it fair to consider the money I’m not spending on rent or the mortgage as income? That’s an additional $X per month that I can invest, spend, or donate.

Brian
Brian
1 year ago
Reply to  Michael Clark

I wouldn’t think of it as income, but as lowering your expenses, which translates into a lesser amount of retirement assets needed. If you are aiming to amass enough assets to support a 4% withdrawal rate in retirement, then if your expenses plus mortgage is $40,000/yr you would need to save $1,000,000 to retire. By paying off your house, if that would hypothetically drop your annual expenses to $28,000 (sans mortgage payment), you only need to have saved $700,000. That’s why paying off your mortgage before or at retirement is such a boon in my opinion, it means you have… Read more »

Michael Richard
Michael Richard
1 year ago

Real estate is something you can see, feel, and utilize. Life is about living, and real estate can provide a higher quality of life. Stocks aren’t event pieces of paper anymore, but ticker symbols and numbers.

Petra
Petra
1 year ago

In general, toddlers need to put everything in their mouth and feel everything with their hands.

When you grow up, you can start to be able to have a more abstract understanding of the world you live in.

The words you use (a house is something you can see and feel, stocks are ticker symbols) make me believe that you haven’t fully reached maturity yet. Perhaps some day.

lmoot
lmoot
1 year ago
Reply to  Petra

I disagree that the desire to not invest totally in something abstract, is a sign of immaturity. Just different values. I cannot thing of anything more mind-numbing than working long hours, to make the most money, to invest in stocks that I can one day benefit from. I’d rather work long hours, making the most money, to invest in something that I am both passionate about, good at, and earns me money. Therefore I am choosing to invest in real estate. I’ve met amazing people, made lifelong friends, learned real-world skills, and made more money so far, than I have… Read more »

El Nerdo
El Nerdo
1 year ago
Reply to  lmoot

hey lmoot!

it’s been ages

what you’re doing i think is not just an “investment” in the sense of compounding savings, but a side business—a 2nd job that you do after hours.

different story altogether and not quite what salmon advocates either.

Accidental FIRE
Accidental FIRE
1 year ago

Besides the fact that the stock market easily out-performed the housing market over that longer period of time, houses take maintenance. The author is not calculating all the money you’re dumping into your house to fix things. I don’t know about anyone else, but I never had a mold problem or had to fix a leaky faucet on my index funds.

Chris
Chris
1 year ago

I wonder if the author lives on one of the US coasts, where housing does usually appreciate faster than other areas of the country? I am glad you did an article about this, JD, I did go read the article and thought it was kind of nuts. In our family, a paid off house for retirement is left to the surviving spouse for an asset to help pay in case they need nursing home care. Unfortunately, it was not enough to pay for the long term nursing home care both of our grandmas experienced, so they both ended up on… Read more »

Ross Williams
Ross Williams
1 year ago
Reply to  Chris

“Unfortunately, it was not enough to pay for the long term nursing home care both of our grandmas experienced, so they both ended up on Medicaid.”

Which describes perfectly the problem with a retirement system that relies on individual savings. Unless you are wealthy, you can’t save enough to be truly secure for the rest of your life. “Lucky” people die before the money runs out.

Tim
Tim
1 year ago

Felix also said recently that people who have $1M in 401k’s are taking a ridiculous risk, oh but a $1M house is cool?

https://twitter.com/felixsalmon/status/1017433294026223616

Sheryl
Sheryl
1 year ago
Reply to  Tim

Wow! This guy is something else. Something he also apparently misses is the people who don’t have the “good luck” to invest consistently in their 401Ks are also the people who address their “bad luck” by cashing out their home equity and/or defaulting on their mortgages. Somehow I managed to retire with $1M in my retirement accounts, and I could only afford to max out my contributions for the last few years of my 30-year career. However, I started saving the day I started working! I also paid off my mortgage, but guess what? My house is worth almost exactly… Read more »

Josh
Josh
1 year ago

While I agree with JD’s overall point, I think it’s only fair to note that Salmon specifically talks about urban housing, and my guess is he isn’t talking about Oklahoma City, but rather NYC, LA, SF, Boston, etc. If you only look at those markets, and you figure in the growing difference between rent and paying down principle and the high likelihood of significant rent increases in those areas (v. static mortgage payments) it likely looks much closer than the graph JD shows. That, and it allows for diversification of an asset portfolio since most folks aren’t investing in real… Read more »

El Nerdo
El Nerdo
1 year ago
Reply to  J.D. Roth

Even in an urban setting, to commit your whole savings to an illiquid financial instrument with no diversification is still stupid.

S.G.
S.G.
1 year ago
Reply to  Josh

Well, his price and growth numbers came from somewhere. $318k doesnt sound like LA, NY and SF to me, but it came from somewhere and it should be traceable.

Elyse
Elyse
1 year ago
Reply to  Josh

As someone who just sold their suburban home and am happily renting in an urban environment, I have no doubts that renting was the right financial move. I’ve done detailed comparisons of buying and renting in my area, and I’m absolutely saving by renting. What I was paying in mortgage principle is now going to a savings account which will yield interest to subsidize rent in retirement.
Only if/when there’s a significant correction (>20%) would I consider entering the Boston housing market again.

Joe
Joe
1 year ago

I just heard something similar on the radio. The host said if you invested the same amount in a house over the last 15 years, you’d beat the market. The S&P 500 returned 5% and housing returned 8% or something like that.
I’m pretty sure they left out all the other cost of homeownership, though. Utilities, property tax, repair and maintenance, furniture, etc… Owning a house involve much more than paying the mortgage.
Anyway, good study.

Sharur
Sharur
1 year ago
Reply to  Joe

Note that with a “home” (i.e. a house that you are living in while you pay it off), one shouldn’t (in my opinion) count the full amount one is paying towards the mortgage, but rather the difference between that and what you would be paying to rent a living space. E.g. If buying your home costs you $1200 a month and the rent you would be paying is $800 a month, you are really only investing $400 a month (plus taxes and maintenance).

Mr. Pop
Mr. Pop
1 year ago

Good post JD-I generally like Felix’s stuff on Market Place, but he is way off here. One additional angle would be location of the home. About 1/3rd of our net worth is tied up in Florida Real Estate (home, land, rental property), but we’re comfortable with that because the of the demographics of the area.

Brooklyn Money
Brooklyn Money
1 year ago
Reply to  Mr. Pop

Mr. Pop — What about climate change and flood insurance? I don’t know where your real estate is located in FL but aren’t buyers getting skittish about those risks?

herman schwartz
herman schwartz
1 year ago

Let’s see. I bought my home in 1985 for $135,000. The bank gave me a 25 year mortgage. Today, my house is worth $1.25million. Unfortunately, I sold it in 2015 and only got $996,000. Bummer, eh? I bought another home in my new retirement location for $160,000 and put the rest of my money in cash accounts. I never liked Wall Street. Oh and yes, combined with my meager savings account, thanks to my house, I retired a millionaire. My home did all the work for me. Not the other way around.

Ron C.
Ron C.
1 year ago

Herman, you got a abnormally high rate of return on your house – about 6.9% vs the normal 3-4%. I’m guessing you may have put some time and money into upkeep or additions. If you’d invested that money into “wall street”, it would have grown a little over 11%/year. That would have netted you about…$3,000,000. Having said that, you didn’t make “the wrong” decision, but one that clearly was right for you. And you still retired a millionaire, congrats!

S.G.
S.G.
1 year ago

This analysis is apples and oranges on so many levels. For example: if you “invest” in your home you are putting your money into a single property, not into “the market”. The major reason most of us invest in indexes is because of the volatility of individual stocks. An individual company can plunge (or take off) while the overall market does the opposite and the same is true of a house (as people in Houston without flood insurance can attest). Second, I dislike these kinds of comparisons on both sides because it’s like saying a hammer is better than a… Read more »

Douglas T
Douglas T
1 year ago

“The bottom line, somewhat surprisingly, is that the average annual price increase for U.S. homes from 1900 to 2012 was only 0.1%/year after inflation!” http://observationsandnotes.blogspot.com/2011/07/housing-prices-inflation-since-1900.html.

Why? Because if real estate appreciated faster than inflation, after a couple of decades, people would spend their entire paychecks on housing and it would literally eat up the entire economy. (remember the lesson on compound interest).

Mucho
Mucho
1 year ago
Reply to  Douglas T

Or live in a shoe box like me, while watching healthcare eat the conomy.

Brooklyn Money
Brooklyn Money
1 year ago

I bought my apartment in 2012 (see user name for where). Got lucky. Timed it right. Yes, it’s appreciated insanely. Do I focus on that at all? No. The subway is shutting down in my neighborhood for repairs. That is a HUGE risk. Who knows what it will do to the value of my apartment. There are so many risks with housing. Neighborhoods change. Tastes change. Yes, Brooklyn is probably one of the most desirable cities in the world right now, but will it be forever? Who knows. The only way to make money on my place is to sell… Read more »

Tom
Tom
1 year ago

“I hope you’re at least a little bit embarrassed at how much of a tax break you’re getting compared to people who need government support much more than you do.” This is a pretty ignorant thing to say. Welfare (or any government support) is not a huge bucket of money that when it runs out they stop handing out benefits. Anyone who applies gets it. You’re not depriving someone of a meal or home by taking tax deductions. Where does someone so out of touch and dare I say dumb find a writing job? “I read a piece at Slate…”… Read more »

S.G.
S.G.
1 year ago
Reply to  Tom

Not just that.

People taking tax writeoffs are, generally, tax PAYERS. People who get welfare typically aren’t.

So essentially he is saying tax payers take money from poor people when they pay less in taxes.

Tyler Karaszewski
Tyler Karaszewski
1 year ago

> Once you’ve become a millionaire homeowner, you now have to tap that equity for it to be of use. That’s not true, and the reason why is the primary reason I want to have my house paid off in retirement. Having no mortgage payment on a $1,000,000 house pays dividends equivalent to the mortgage payment on a $1,000,000 house, or roughly $5,000/month. Yes, you can argue you may have gotten better returns in the stock market, and you could use that money to pay the $5,000/month housing payment, but the returns on the mortgage payment are guaranteed (not guaranteed… Read more »

Biggreydog
Biggreydog
1 year ago

That’s a nice simple way to look at the return from a personal-use real estate investment from a slightly different angle. Well put.

Carmine
Carmine
1 year ago

First time commenter here! First off, thank you for these posts JD! GRS is one of just two saved sites on my phone’s browser for ease of compulsive checking! Now, don’t get me wrong, I appreciate this and other recent posts on the perils and difficulties of home ownership, but they’re sort of piling up into a major downer as I read them! Maybe it’s just my confirmation bias speaking, but I think myself VERY lucky to have been able to buy a home! Obviously, luck and timing were huge factors in making this happen. And committing to one location… Read more »

JanBo
JanBo
1 year ago
Reply to  Carmine

As a retiree I do not see my house as a cash cow. We saved AND we paid off the house AND we stayed with jobs that had pensions. It is a balance. As another commentator stated, don’t argue between hammers and screwdrivers. You need them both. If you are FIRE, things may be different, but what percent of the nation is? I contend that the writer of the article did not say not to save, he stated that you are much more likely to save in a house then in the market. “The return on stocks you never buy… Read more »

S.G.
S.G.
1 year ago
Reply to  JanBo

Could you clarify “Their mortgage is 3%”?

JanBo
JanBo
1 year ago
Reply to  S.G.

The interest rate on their mortgage is 3%. Sorry I shortened that to our household terms.

S.G.
S.G.
1 year ago
Reply to  JanBo

Thank you! My first thought was that was simply an exceptionally low mortgage payment as it relates to their income. But it being a rate makes so much more sense to me.

JKC
JKC
1 year ago
Reply to  J.D. Roth

Yes and … 1) Factor in leveraged returns – (as others have mentioned) 2) Note that some geographical markets exceed the typical rate of appreciation. See comments above about Bay Area and other metropolitan markets. 3) You gotta live somewhere – either paying mortgage or rent. 4) Yes, your maintenance expense is higher if you own vs. rent. 5) At least *mention* the field of investment real estate. If it’s a house I don’t live in, I can sell it and realize the ROI. Yes, these things have been said before, but not by you, and not to this specific… Read more »

Ron C.
Ron C.
1 year ago

I love how the article author intentionally left out the down years of home values! It just goes to show:

“Statistics are like bikinis – they show you a lot, but they can cover up some very important things.”

A Millionaire Next Door
A Millionaire Next Door
1 year ago

I do not know Felix Salmon nor have I head this article (or any of his articles and probably never will). However, based on the excepts I see in JD’s article, Felix most likely is a journalist, not an actual investor who is a millionaire….just speculation on my part. He comes across as a “Not Expert” (as seen on ESIMoney.com). Years ago, an LA Times business journalist blasted the book “The Millionaire Next Door” saying it’s not possible for the average person to become a millionaire. I emailed the journalist as I disagreed strongly with his “sour grapes” article. In… Read more »

Elle
Elle
1 year ago

Years ago, an LA Times business journalist blasted the book “The Millionaire Next Door” saying it’s not possible for the average person to become a millionaire.

Hmmmmm, we are quite average and we reached millionaire status and 2 paid off homes by age 50. We continue to work and invest in our 401k/403b to further enhance retirment funds. I remember buying and reading that book. It was motivating. Our other motivator was “Your Money or Your Life”. Practicing (most) of their principles was fiscally life changing for us!

Ross Williams
Ross Williams
1 year ago
Reply to  Elle

“Years ago, an LA Times business journalist blasted the book “The Millionaire Next Door” saying it’s not possible for the average person to become a millionaire.” The real criticism of the book was that it made being a millionaire sound unusually rich and financially set for life. That just isn’t reality. There are lots of paper millionaires out there in the American middle class. If you accept the 4% rule, a million bucks in your retirement account gives you $40,000/year to spend, minus taxes. That doesn’t count the folks whose house is now worth a million bucks even though its… Read more »

lmoot
lmoot
1 year ago

Airbnb that crap and MAKE it an investment. The market is not the only thing to determine the ROI of a house (unlike the stock market). There is plenty you can do to profit from real estate…and no, I’m not talking about a career real estate investor. I feel like to ONLY present the market average, completely ignores the many ways people use property to make money (home business, roommates/tenants/short-stay guests, sweat equity, wholesale). I am one of those wackadoodles that only contributes to retirement up my employer match…and the rest goes towards capital and improvement of real estate. My… Read more »

S.G.
S.G.
1 year ago
Reply to  lmoot

Real estate AS an investment is another issue entirely and doesnt seem to be what the author was arguing.

lmoot
lmoot
1 year ago
Reply to  S.G.

But a lot of people these days profit from their home without being “real estate investors”. That’s why I pointed out “career investors”. I can understand using stock market data to determine ROI over a period of time…what you see is what you get. But it’s not always as simple to look at a real estate property’s value on paper and say “this is the total value this property will provide/has provided”. It’s a tangible thing that has value outside of resale value, and has the ability to earn money without selling (and yes, lose money through upkeep as well).… Read more »

S.G.
S.G.
1 year ago
Reply to  lmoot

I’m sorry, I’m having a hard time following your string of thoughts. Real estate investing is investing. And yes, there are various ways to invest in real estate, airbnb included. But this article was about how buying a home, as just a personal-use single-family home, as an investment. As I said earlier, a house is A form of investing, but I wouldn’t recommend it any more than I would recommend someone tie up a significant portion of their net worth in an individual stock. It makes your net worth way too sensitive to changes in that very specific investment. We… Read more »

lmoot
lmoot
1 year ago
Reply to  S.G.

I know they didn’t talk about it. That was my point. Whenever I see these match for match comparisons between the growth of residential real estate and the growth of stock value, they never consider the hidden opportunities to increase ROI from residential real estate. To say it’s not a valid consideration because that’s not what most people do, is just as crazy to me as saying learning how to maximize your 401(k) is not important because most people don’t care enough to learn about it. I know plenty of people, and you only need to look at ads on… Read more »

GreenDollarBills
GreenDollarBills
1 year ago

Ultimately, wealth should be measured by the total value of assets that can be tapped into and converted into consumption today. Whilst I admit that you could downsize your home the likelihood is that you’ve purchased a home to live in. As such, I don’t consider a home to be an investment. Rental properties, bonds, stocks, pensions are all forms of investments that could be liquidated (some take longer to complete this process than others) in order to consume today. Financial freedom is unlikely to be achieved by paying off your home. You need income generating assets….invest in the stock… Read more »

Kingston
Kingston
1 year ago

Small copy editing note, then feel free to delete this comment. (I looked for a way to private-message you but couldn’t find one on the site.) It’s “Dow Jones Industrial Average,” not “Down Jones.” At first I thought it was a typo but the error appeared twice.

Kingston
Kingston
1 year ago

El Nerdo, Imoot (L or I??), Tyler K … Wow, it really is like old times around here! Maybe nicoleandmaggie will show up. So glad to see this community come back to life.

Mike
Mike
1 year ago

JD — in Excel you want your chart to be a regular “area” instead of “stacked area”. You can right-click on it and choose “change chart type”. Cheers!

EarlyRetirementNow
EarlyRetirementNow
1 year ago

Once you take into account the implicit income from owning a house (=not having to pay rent), a house is an excellent investment even at very low rates of home price appreciation. Or, in other words, your chart equities vs. home prices is terribly misleading because last time I checked, you can’t live in your equity portfolio. If you subtract your rental payments from the equity return you’ll get a very different picture. See the example calculation on how a 2% home price appreciation turns into a 12% IRR when taking into account all the costs and benefits of homeownership:… Read more »

Gasem
Gasem
1 year ago

Much is nebulous. I replaced a roof and windows a few years ago $30K. Redid the bathrooms $15K. Replaced 2 air conditioners this year $10K. My buddy replaced his septic system $25K after all ya gotta poop, oh yea property taxes, and so on and so on and scooby dooby dooby. On the other hand it’s survived more than a dozen hurricanes unscathed. I’m glad I own my home but I think it’s pretty much a wash.

Whirlygig
Whirlygig
1 year ago

I think having a plan that had diverse sources of income/savings is important. We have a house in the fringe of Seattle metro. Every year, the city marches closer. We will have our house paid off when we retire. This gives us the option to sell at what is hopefully a rather profitable price. We could also rent it (I have owned rentals for over 10 years so I get what this entails). We also have money in 401k/IRA accounts. We also have after non-retirement savings/investments. We also own rentals. Somewhere in there we will manage to retire, have somewhere… Read more »

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